A PRESENTATION ON TREASURY PRODUCTS

SHORT TERM FUND

DEFINITION OF SHORTTERM FUND

A type of fund that invests in short-term investments of high quality and low risk. The goal of this type of fund is to protect capital with low-risk investments while achieving a return that beats a relevant benchmark such as a Treasury bill index.

CONTD Short-term investment funds include cash, bank notes, corporate notes, government bills and various safe short-term debt instruments. These types of funds are usually used by investors who are temporarily parking funds before moving them to another investment that will provide higher returns.4

INVESTMENT MANAGEMENT

INVESTMENT DEFINED Commitment of funds for a period of time in order to derive future payments Future payments must compensate the investor for:1. Time the funds are committed 2. Expected rate of inflation 3. Uncertainty of future payments6

SECURITY MARKET LINE (SML)

Reflects the combination of risk and return available on all assets at a given time7

SECURITY MARKET LINE

Overvalued and Undervalued Assets Shift of an asset along the SML due to change in its risk-return characteristics Shift in the SML due to a change in NRFR

INVESTMENT TRUSTS OVERVIEW

Real Estate Investment Trust (REIT) Ownership of a share in a fund which invests in properties Receive periodic payouts due to rental income earned by the REIT Potential for Capital Appreciation Trades like a stock on stock exchanges E.g. Suntec REIT

FINANCIAL MARKET A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible item of value at low transaction cost and at price that reflect supply & demand.

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CONTDFinancial market facilitate: The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) Price discovery Global transactions with integration of financial markets The transfer of liquidity (in the money markets) International trade (in the currency markets)20

FUNCTIONS OF FINANCIAL MARKET

CONTD. FINANCIAL FUNCTIONS: 1. Providing the borrower with funds.2.Providing the lenders with earning assets so as to enable them to earn wealth. 3.Providing liquidity in the market so as to facilitate trading of funds.23

MONEY MARKET As money became a commodity, the money market became a component of the financial markets for assets involved in shortterm borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale

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FUNCTIONS OF THE MONEY MARKET

Transfer of large sums of money Transfer from parties with surplus funds to parties with a deficit Allow governments to raise funds Help to implement monetary policy Determine short-term interest rates

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CALL MONEY Call money is a short term finance repayable on demand, with maturity period of one day to fifteen days, used for inter bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio.

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CONTD.. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money is known as call rate. It is a highly volatile rate that varies from day-to-day and sometimes even from hour-to-hour.

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WHAT IS A GOVERNMENT SECURITIES

A Government security is a tradable instrument issued by the Central Government or the State Governments. Such securities are short term or long term. In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).28

CONTD. Government securities carry practically no risk of default and, hence, are called risk-free giltedged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.29

TYPES OF INSTRUMENTS TREASURY BILLS :- Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India. CASH MANAGEMENT BILLS :- Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-term instrument, known as Cash Management Bills.30

CONTD DATED GOVT SECURITIES :- Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years.

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CONTD. FIXED RATE BONDS These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds are issued as fixed rate bonds. FLOATING RATE BONDS Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at preannounced intervals by adding a spread over a base rate.32

CONTD.. ZERO COUPON BONDS Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to the face value. CAPITAL INDEXED BONDS These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation.33

CONTD. Special Securities - In addition to Treasury Bills and dated securities issued by the Government of India under the market borrowing programme, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash subsidies.

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REPOS A repurchase agreement, also known as a report, or sale and repurchase agreement , is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate.35

CONTD. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. A repo is equivalent to a spot sale combined with a forward contract.36

STRUCTURE A repo is economically similar to a secured loan, with the buyer receiving securities as collateral to protect him against default by the seller. Almost any security may be employed in a repo, though highly liquid securities are preferred as they are more easily disposed of in the event of a default.37

TYPES OF REPOThere are three types of repo maturities: overnight, term, and open repo. 1.Overnight refers to a one-day maturity transaction. 2.Term refers to a repo with a specified end date. 3.Open simply has no end date.

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CERTIFICATE OF DEPOSITS A certificate of deposit (CD) is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.39

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A commercial paper in India is the monetary instrument issued in the form of promissory note.

Prior to Commercial Paper in Indian money market i.e. before 1990, the corporate companies had to depend upon the crude and traditional method of borrowing working capital from the commercial banks by pledging the inventory of raw materials as Collateral security.41

CONTD. The introduction of commercial paper as debt instrument has promoted commercial paper market as one of the components of Indian money market. In this commercial paper market, the issuers of commercial paper create supply while the subscribers to commercial paper create demand for these papers.42

CONTD The main issuers of Commercial paper in this market are corporate and the main subscribers to the Commercial papers are the banking companies. The face value of Commercial Paper is in the denomination of Rs. 0.5 million and multiples thereof.43

FOREIGN EXCHANGE MARKET

The foreign exchange market is a form of exchange for the global decentralized trading of international currencies. The foreign exchange market determines the relative values of different currencies.

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CONTD Foreign Exchange Market in India works under the central government in India and executes wide powers to control transactions in foreign exchange. The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange market in India.45

The Company is subject to a variety of risks due to its foreign operations, including currency risk and credit risk.

If the currency rate rises the company operating in the foreign currency may suffer losses.46

CONTD The Company attempts to minimize its exposure to foreign currency exchange fluctuations by the use of forward contracts on non-functional currency cash and accounts receivable balances.